Question

Logan Company manufactures several toy products. Logan presently manufactures and assembles all the parts for its toy truck product. Another toy company has offered to sell the parts to Logan for $2.50 per truck. Logan is considering this offer. If Logan buys the truck parts instead of making them, the space used in producing the parts could be used for a new toy monster, which is scheduled to begin production next year. If Logan continues to produce the parts for the toy truck, then Logan will have to lease manufacturing space from another company in an adjacent building in order to produce the parts for the new toy monster. The rent that Logan would have to pay would be $15,000 per year.

  

Cost information related to the production of the toy truck parts is as follows.

  

Direct materials                                                       $1.10

Direct labor                                                                   0.30

Variable manufacturing overhead                           0.20

Fixed manufacturing overhead                                0.20

Total manufacturing costs                                    $1.80

  

The marketing department has estimated that sales for the toy truck will be approximately 20,000 units per year for the next three years. The fixed manufacturing overhead is indirect and will still be incurred regardless of which decision is made.

  

By how much will overall Logan Company’s net income change if Logan decides to stop making the parts itself and instead BUY the parts from another toy company?

• Logan Company net income will INCREASE by $14,000 if Logan stops making the parts itself and instead buys them from another toy company.

• Logan Company net income will DECREASE by $3,000 if Logan stops making the parts itself and instead buys them from another toy company.

• Logan Company net income will DECREASE by $14,000 if Logan stops making the parts itself and instead buys them from another toy company.

• Logan Company net income will DECREASE by $18,000 if Logan stops making the parts itself and instead buys them from another toy company.

• Logan Company net income will INCREASE by $18,000 if Logan stops making the parts itself and instead buys them from another toy company.

• Logan Company net income will INCREASE by $3,000 if Logan stops making the parts itself and instead buys them from another toy company.

Answer 1

	Per unit		Total 20000 units
	Make	Buy	Make	Buy
Direct materials	1.10		22000
Direct labor	0.30		6000
Variable manufacturing overhead	0.20		4000
Opportunity cost			15000
Purchase cost		2.50		50000
Total			47000	50000

Difference in favor of making = 47000-50000 = $3000

Logan Company net income will DECREASE by $3,000 if Logan stops making the parts itself and instead buys them from another toy company.

Option B is correct